Feeling the pinch
You’re not alone in the battle for economic survival. South Africa’s small and medium companies are falling on hard times too... A recent article in The Times alleges that the “bleak economic situation” is leading to a surge in company liquidations. It’s something our attorney confirmed earlier this week too. He said that the nature of the cases coming through his office had changed in the last two months – from conveyance to liquidation.
We’ve already discussed the impact of higher interest rates on consumers. As CPIX went to 11.6% we’d already received reports of vehicle repossessions reaching 6 000 units per month. The country’s big banks have also stepped up house repossessions, with rumours of around 300 to 500 houses per month – depending on the bank... But we forget that companies (particularly the smaller ones) have to wade through the same economic obstacles. With PPI coming in at more than 16% in June and interest rates up 10 times in the last two years they’re starting to crack.
June’s liquidations up 28.7%
Statistics SA says the number of liquidations jumped 28.7% in June 2008 compared to the previous period. This means 233 companies closing their doors in just thirty days with the usual knock-on effect on the overall economy. For the first six months of this year liquidations are up 10.2% to 1 432 cases. And the biggest increase over this period has been in the number of compulsory liquidations – up 61.3% from 93 to 150 instances. What businesses are closing?
A closer analysis of the numbers shows that companies in the finance, insurance and real estate industries (with 542 liquidations) and those in the wholesale and retail trade, catering and accommodation sectors (499 liquidations) led the way. Although these are rather wide definitions the are broadly in line with the sectors that are struggling due to higher interest rates and the impact on consumer affordability.
Bill Lacey, an economist from the SA Chamber of Commerce and Industry, told The Times that: “The business community is going through a tough time economically, and this is as a result of many issues such as the limited access to credit and the challenge businesses have to meeting demand. Most companies will find it difficult to satisfy consumers’ needs as a result of escalating prices.” And smaller companies are likely to take more strain in coming months. Stanlib economist, Kevin Lings ventures: “Smaller companies stand a higher risk of getting out of business and things will get worse in the next 12 months.”
Insurance companies taking strain
FAnews Online has previously reported on the difficulties faced by companies in the short-term insurance industry. Nowhere is this better illustrated than at one of the country’s leading insurers, Mutual & Federal. The group announced recently that it would be cutting jobs to realign the business. Among the reasons for the move were unexpectedly high commercial fire claims and a declining underwriting margin. The dire situation many insurance clients are finding themselves in will not have helped. We’ll have a better indication of where things are going when Mutual & Federal reports their latest results tomorrow.
But the short-term insurers aren’t alone. Any company exposed to the world’s turbulent investment markets is in for a few tough reporting periods. On Wednesday this week both Old Mutual and Liberty Life will report their latest interim results. And they’re not likely to impress. Liberty has already warned shareholders that its earnings would be between 40% and 50% worse than the previous comparable period.
There are two areas that insurance industry analysts will be watching closely. The first is policy lapses – which are an indication of how well the consumer is dealing with the current economic conditions. Higher lapses are a leading indicator of client’s switching their expenditure from ‘voluntary’ life cover to meet immediate monthly needs. The second measure is a related concept: persistency. This is a measure of the lifespan of the average policy. Again, life insurers want the persistency levels to be high.
Diversification won’t save these giants
A great deal has been written about the diversification of South Africa’s life insurance giants in recent years. None of the big players remain ‘risk’ only businesses. They have moved into asset & wealth management and other areas of financial services too. The problem is that these diverse business interests are all squarely in the financial services industry. And prospects in these areas have been stunted by the tough economic conditions too...
Editor’s thoughts:
There’s no doubt that the current economic conditions make it difficult for small businesses to prosper. Should a struggling small business simply close its doors – or struggle through the tough times to emerge a meaner and leaner operation when the economic conditions turn? Add you comment below, or send to [email protected]
